FINRA fined a large broker-dealer $6.25 Million for failing to prevent customers from using lines of credit to purchase securities, thereby violating the margin rules. The BD offered a program whereby customers could borrow against their brokerage accounts and use the proceeds for purposes other than buying securities. However, FINRA alleges that the firm failed to implement adequate supervisory procedures to educate and train employees and customers and prevent the misuse of the lending proceeds. FINRA maintains that customers often borrowed and invested in securities within 14 days.
OUR TAKE: This case shows the difference between policies and procedures. A policy states a firm’s position on a course of conduct or practice. Procedures are then required to implement that policy and ensure compliance. Firms that stop at broad policy statements have not implemented an adequate compliance program.